Content View

[Macro Strategy] ECB’s QE likely to boost purchasing power

January 19, 2015 17:46|January 19, 2015 17:46
facebook twitter print
Despite its low interest rate, the ECB’s bond purchases should bolster the European economy by stimulating sales of durable goods (the pent-up demand for which is high).

Strategy Focus

■ European QE likely to boost purchasing power

- The ECB is expected to implement bond purchases worth EUR1tn (bond buying by member nation will likely be determined by their investment-to-capital ratios). While some investors believe that the effects of this bond buying will be limited (due to the region`s low interest rate), we point out that QE in the US and Japan shored up their respective economies despite their low base rate stances.

- Rather than focusing on Europe`s low interest rate stance, we draw attention to the efforts being made to reduce deflation concerns in the household and corporate sectors. We expect the ECB`s bond purchases to lead to an economic recovery in Europe.

- Against this backdrop, investors should focus on whether Europe`s durable goods sales pick up. Of note, with replacement demand mounting, durable goods sales (including for auto and IT) have yet to return to the levels seen in 2007.

- In the US and Japan, durable goods sales have historically tended to pick up one quarter after the implementation of bond buying programs. Moreover, we note that recent monetary expansion programs in Japan have led to an operating margin turnaround in the nation`s durable goods sector. Similarly, we expect European stocks to rebound two to three months after the ECB implements its bond purchasing program.

■ Foreign supply-demand conditions unlikely to improve until mid-February

- Due to low seasonality and lingering external uncertainties, foreign investor supply-demand conditions (in the domestic market) are unlikely to improve until mid-February.

- Historically, foreign capital seeking domestic dividends tends to flow out of the market between Jan 1 and the March simultaneous expiry. Moreover, with capital continuing to leave EMs due to lingering external uncertainties, we expect US and UK investors (both of which ranked high in terms of net selling in the domestic market in Dec 2014) to continue their selling sprees for the time being.

- Turning to other groups of investors, while ITCs` selling should slow, pension funds` buying is unlikely to pick up in January.

- With the Kospi trading at low valuations (including a P/B of 1x), institutional investors are believed to be waiting for an opportune time to re-enter the market.

- However, considering that the 4Q14 earnings season is due to peak over end-January~early-February, and further considering that Greek political uncertainties could re-surface around Jan 25, additional institutional buying is unlikely to materialize until mid-February.

- With supply-demand conditions set to remain subdued this week, we recommend focusing on the sectors for which consensus is improving-ie, the hotel/leisure and IT hardware sectors.
*Source: NH Investment & Securities